Age pension out of touch with the needs of non-homeowners

While all the current attention is on the exemption of the family home from the age pension assets tax, a more important issue for current and future retirees is the harsh treatment of non-homeowners.

Our social security system was designed when house prices were low and rents affordable and over the years scant attention has been paid to the changing situation of non-homeowners. Now with low investment returns and much higher rents, the financial situations of non-homeowners are deteriorating rapidly, forcing many to draw on their capital to live.

Consider the facts. The maximum level of rental assistance for non-homeowners of $120 a fortnight or $3120 a year has not changed for many years despite rising rents. Non-homeowners are subject to the 50 per cent pension income test even on income needed to pay their remaining rent and the assets test only provides an additional $146,500 exemption to non-homeowners.

Even increasing this additional asset test exemption to a more realistic $500,000 would not provide sufficient compensation for rental costs because the separate income test makes no allowance for the rental needs of non-homeowners. As a result, even if pensioners are able to earn the new maximum deeming rate of 3.25 per cent on the proceeds from selling a house, they will lose financially and be forced to draw down their capital.

A simple example highlights the potent effect of current income and asset test arrangements on non-homeowners. Consider a single homeowner on the full age pension owning $202,000 of other assessable assets who sells the home and invests the net proceeds of $500,000 to provide more flexibility with their income.

In this situation, the assets test determines the pension entitlement. The net sale proceeds less the $146,500 non-homeowner exemption is subject to the asset test at a rate of 3.9 per cent.

The end result is an annual reduction in pension entitlement of $13,787. Even after receiving the maximum rental allowance of $3120, the net pension payment falls by $10,667. Investing the sale proceeds of $500,000 at the maximum 3.25 per cent deeming rate would generate an annual income of $16,250. Overall a net amount of $5,583 annually would be available to pay rent.

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Daryl Dixon

Executive Chairman

Daryl Dixon is one of Australia’s foremost investment experts and a well known writer and consultant. He has provided trusted advice to thousands of personal clients over more than 25 years and is an acknowledged expert in the areas of tax, superannuation (including public sector superannuation), social security and investments.

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